Investment income includes interest, dividends, and capital gain distributions.

History

In the past, many high-income parents found they could transfer some of their income into their child’s name and be taxed at the lower rate for the child. Congress created the “kiddie tax” to close this loophole.

Originally, the “kiddie tax” affected children ages 14 and younger. Children with unearned income (meaning income from interest, dividends or capital gains) were taxed at their parent’sincome tax rate. So a parent could wait until a child turned 14 to sell appreciated stock and would then be taxed at the child’s lower rate.

In 2006, the kiddie tax was changed and the age was raised to 18 years old. Then, in 2008 and 2017, the kiddie tax age was raised again. Currently, the kiddie tax now applies to all children under age 18, as well as to full time students who are 19 through 23 years old and are not self-supporting.

Investment Income Limits

Some of a child’s investment income is tax-free, while some is taxed at the child’s rate. There are limits on how much of a child’s investment income can be tax-free and how much can be taxed at the child’s lower rate. The first $1,050 of investment income for a child is still tax-free (for 2018). The next $1,050 is taxed at the child’s tax rate.

Any amounts over $2,100 per year (for 2018) are taxed at the federal trust and estate tax rates.This is a change in 2018. Chirldren’s investment income used to be taxed at their parent’s income tax rate. That made calculating the kiddie tax very complicated. Its a simpler calculation now, but pay be more punitive sine the tax rates for trusts and estates are now used.